Question

True false:

1. Under the CAPM, investors require a rate of return that is proportional to the volatility of each asset.

2. The simple average of all equity betas in a market must equal exactly 1, by construction.

3. All assets and portfolios that plot on the Capital Market Line have returns that are perfectly positively correlated with the market portfolio.

4. A firm that operates in rural areas, and is more exposed to bush fire risk, will have a higher beta than an otherwise identical firm that operates in a major city.

5. Under the CAPM, no asset or portfolio has a higher Sharpe ratio than the market portfolio.

6. Under the CAPM, it is possible for an asset to have a negative beta, but a positive expected return.

7. Under the CAPM, it is possible for the market portfolio to include a short position in one or more assets.

8. Under the CAPM, risk-averse investors will try to avoid volatile stocks and invest only in stocks with low volatility.

9. Under the CAPM, investors with high wealth and low risk aversion have more impact on stock prices than do investors with low wealth and high risk aversion.

10. Under the CAPM, the only way an individual stock could plot on the CML is if it happens to have exactly the same expected return and standard deviation as the market portfolio.

Answer #1

1. Under the CAPM, investors require a rate of return that is proportional to the volatility of each asset.

**True - As per CAPM, Required Return = Risk Free Return +
Beta*(Market Risk Premium)**

2. The simple average of all equity betas in a market must equal exactly 1, by construction.

**False - The weighted average must be equal to
1**

3. All assets and portfolios that plot on the Capital Market Line have returns that are perfectly positively correlated with the market portfolio.

**True, The returns are perfectly positively correlated
with market portfolio.**

4. A firm that operates in rural areas, and is more exposed to bush fire risk, will have a higher beta than an otherwise identical firm that operates in a major city.

**True, Higher the systematic risk higher will be the
beta**

QUESTION 1
Under the CAPM, investors require a rate of return that is
proportional to the volatility of each asset.
True
False
QUESTION 2
The simple average of all equity betas in a market must equal
exactly 1, by construction.
True
False
QUESTION 3
All assets and portfolios that plot on the Capital Market Line
have returns that are perfectly positively correlated with the
market portfolio.
True
False
QUESTION 4
A firm that operates in rural areas, and is more...

Under the CAPM, investors with high wealth and low risk aversion
have more impact on stock prices than do investors with low wealth
and high risk aversion.
True
False

Under the CAPM, the only way an individual stock could plot on
the CML is if it happens to have exactly the same expected return
and standard deviation as the market portfolio. True /False

Can the expected return on individual stocks on the CAPM be
higher than the expected return on the market index portfolio? If
it can be high, is it just because of beta?
And what are some of the indicators that individual stocks always
have lower than capm?

What CAPM inputs are the same for every project? What
CAPM inputs are specic to your project?
What asset has a beta of 1? What is the appropriate
market rate of return for a security with a beta of 1?
What asset has a beta of 0? What is the appropriate
market rate of return for a security with a beta of 0?
Do projects that have high variance, but whose risk can be
diversied away in our portfolio, need...

A- The CAPM says that the average return on a stock should be at
least the return on a riskless asset and compensation for
bearing
choose one of the following:
1-firm-specific risk. 2-market risk. 3-firm-specific and market
risk. 4-alpha risk. 5- beta risk. 6- alpha and beta risks.
B- Since the market portfolio beta is equal to
---------------------a stock with a beta of 1.00
is---------------------the market portfolio.
choose two of the following for each blink:
1- 0 2- 1 3-100...

1. The
risk-free rate of interest is 2%. Stock AAA has a beta
of 1.4 and a standard deviation of return = .40. The
expected return on the market portfolio is 9%. Assume CAPM
holds. (Note: the questions below are
independent not sequential.)a) Plot
the security market line. Label all axes of your
graph. Plot (and label) the points (and numerical
values) corresponding to the market portfolio, the
risk-free asset, and stock AAA.b) Your
current wealth is $1,000. What is the expected
returnfor a portfolio where youborrow$500 at the risk-free...

8. (5) True or false or Uncertain. Explain briefly.
By the CAPM, stocks with the same beta have the same
variance
If CAPM holds, α should be zero for all assets.
Optimal portfolios should exclude individual assets whose
expected return and risk (measured by its standard deviation) are
dominated by other available assets.
A stock with high standard deviation may contribute less to
portfolio risk than a stock with lower standard deviation.
Diversification reduces the expected return on the portfolio...

1A) Risk-averse investors who hold a single stock would require
a higher rate of return on a stock whose standard deviation is 0.33
than on a stock whose standard deviation is 0.18. But, if these
stocks are held as part of a portfolio, it is possible for the
stock with the higher standard deviation to have the lower required
return. True/False?
1B) Ceteris paribus, a change in the beta of a firm's stock will
change the required rate of return...

investors require an 9.548% return on stoc
k. If the risk-free rate is 1.1% and the market risk premium is
6.4%, what is the beta according to the CAPM?

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